Shanghai’s Tokyo Moment

As Shanghai ponders how to take its place as a global financial center alongside London and New York, a good example may be Tokyo – at least in terms of what to avoid.

Associated Press

Shanghai’s remake has already attracted some of the world’s biggest banks and insurers to its Pudong district, which includes stock, bond and commodity exchanges.

Like Shanghai is today, Tokyo in the 1980s was a focal point for the world’s No. 2 global economy, and striving toward international financial-center status. Its banks were bulging with cash and extending tentacles world-wide. Foreign financial firms were starting to put their regional headquarters in Tokyo, seeking deposits from high-saving locals and making designs on its future as a global investor.

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These days, Shanghai–which is gearing up for the Liujiazui Forum, a key annual financial meeting that kicks off later this week–is getting that kind of attention. A two-year-old central-government policy calls the east coast city the preferred financial center for China and aims to elevate its global status by 2020.

A new study looks at the likelihood the government plan will succeed. Being published Tuesday by the American Chamber of Commerce in Shanghai, the “Achieving 2020” report finds numerous institutional hurdles, though it tilts toward optimism.

A portion of the study–written by Douglas J. Elliott, a former J.P. Morgan investment banker who is now a Brookings Institution fellow–aims to derive lessons from Tokyo’s experience.

Japan never fulfilled expectations in finance. “Tokyo seems to be an example of a potential global financial center whose governmental policies and overall structure of business and government held it back from gaining true global status, despite major advantages,” it says.

Shanghai shares many of the same attributes that Mr. Elliott points to in the report as explanations for why Tokyo failed to capitalize on strengths.

Japanese regulators and politicians, according to Mr. Elliott, stifled adoption of Western-style financial products and created Japanese-tailored solutions suited primarily to the domestic market. Activity was–confusingly for foreigners–governed by local laws and language.

The policy to make Shanghai a globally recognized financial and shipping center was announced in Beijing in 2009 and considered a major endorsement for local authorities to reclaim the world-city mantle it enjoyed during the first half of the 20th century. Shanghai’s remake has already attracted some of the world’s biggest banks and insurers to its Pudong district, which includes stock, bond and commodity exchanges. Also in place: a bronze bull like the one near Wall Street.

More recently and potentially significantly, the seven-month tenure of Guo Shuqing as chairman of the China Securities Regulatory Commission has produced crackdowns on insider trading and a fresh welcome mat for foreign institutional investors. Mr. Elliott says the more lucrative and complex parts of the finance sector turn on “trust and confidence,” two factors investors say have been missing in a Chinese stock market that trades 60% below its 2007 peak.

But in addition to these steps, Shanghai has had some notable misses. Hong Kong appears to be driving innovation in yuan financial products. Goldman Sachs & Co. recently put its top regional banker in Beijing. Fang Xinghai, a primary Shanghai financial sector policy maker, recently told reporters the city’s role in global finance will be directly related to the speed with which the yuan is made an international currency, and that some policies have been “a little late.”

Mr. Elliott considers London and New York as the only true global financial centers. He cites a definition of such a center as a “dense clustering of a wide variety of financial businesses in one centralized location.”

He concludes that it is a “virtual certainty” that Shanghai will become a major financial center and perhaps the dominant one in Asia, given its already huge and growing financial market, plus advantages like functioning futures markets and its urban vibrancy.

But he cites more hurdles. Conservative regulation, opaque and distant decision-making, global reluctance to adopt Chinese law in transactions and a dearth of support functions all favor the incumbent centers, he says. “Being very good at half or three-quarters of an overall task is not good enough, since it is relatively easy to choose London or New York instead, locations where everything can be done efficiently,” he argues in the report.

Though Hong Kong is emerging as the key center for internationalizing the yuan and is retaining China-focused financial professionals with its low taxes, the report plays down the importance of that city and Singapore as competitors to Shanghai.

The report is supplemented with a review of local financial markets written by locally based bankers who are associated with AmCham.

This group is critical of local product development and opaque government policy, but nevertheless credits strides like the Shanghai Stock Exchange’s ranking as No. 4 world-wide by the value of share trading in helping the city’s chances. “Through these accomplishments, Shanghai has more than earned the right to strive toward becoming an international financial center,” they conclude.

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